Tata Coffee not merging with Tata Global Beverages: MD

Sonia: If you could throw some clarity on the rumours that the Tata Group is looking to go ahead and sort of amalgamate or even consolidate its entire beverage business and may merge Tata Coffee with the parent Tata Global Beverages. What is your take on that?

A: There are two kinds of mergers, one is what you would call the virtual merger and the other one essentially is what you call a legal entity merge. As far as the Tata Group is concerned, the beverage sector is already one unit under a group called Tata Global Beverages and Tata Coffee is very much a part of it.

Our individual business and all are tuned to one strategy. There have been no developments in the recent past to trigger this question. Situation will remain exactly what it was, what we had formed about three years back. There has been no recent development on the other way.

We are working as a group, it is a beverage group that encompasses all our tea, coffee and water and it is driven by Tata Global Beverages from the executive office level.

Latha: Probably because of legal reasons no steps have been taken on the merger as of now – legal merger?

A: Yes and it is not really required because as a business we run as a group. It is one combined strategy and is worked out over there.Latha: If you can take us through your individual segments. The Eight O' Clock Coffee segment, we understand is on a sticky wicket because of the global preference for poured coffee and even increasing competition from Nestle. What is the strategy on that segment?

A: Eight O' Clock Coffee fortunately is in both the segments. It is in the bag business which has been under pressure; the whole bean as well as ground business. It has been under pressure but the entire brand was revamped and we have come back and fighting back the market share per se.

Eight O' Clock Coffee got into the pot business almost 1.5-2 years and although the industry has been showing a double digit growth Eight O' Clock Coffee’s growth has been higher on that segment. So, it has straddled it very well, now the question of going into new geographies and expanding market.Sonia: Just to get a sense of how your margins are expected to pan out from hereon because in the year gone by your margins were absolutely flat, so you could not grow them too much beyond that 19 percent mark. Do you think FY15 will also be a year when despite higher revenues you may not be able to move much on margins because of the input cost?

A: If you look at the critical factor that drives this business is the coffee. Brazil coffee production has shown a decline. Now it is more or less confirmed because of very severe drought over there. Anything between 25 percent shortfall which is already reflected on the coffee prices; it has gone up, now New York is trading at about 120 looking at USD 2 mark. Although Vietnam which is the other large producer has not had a shortfall in production the same effect, the arbitrage effect comes in. So, we are looking at a fairly bullish market on as far as the coffee goes.

Tata Coffee actually has six income streams where we have got instant coffee business which accounts for now almost 50 percent of the turnover. Then we have got green coffee. Other very important area is pepper which contributes a large amount to our bottomline. Then we have got tea and to an extent now we have got some amount of income from timber.

So, if you look at it all in all – I understand our margins had to reached to 20 percent levels, it has come down to 19 percent but in a commodity space that still is a fairly good margin. We do see a consolidation of the instant coffee market in second half of the year. First half because of various turbulence in Russia, markets is coming back and there will be also a consolidation in the industry. So, all in all 19-20 percent is a pretty healthy margin. We are working on maintaining but again it is coming in hopefully the integrated business model of Tata Coffee will play off where last year pepper came in and this year green coffee comes in. So, all in all balancing the overall numbers.

Topline there has been a very steady growth. If you look at the last couple of years it has been showing 20-22 percent. It was essentially growth with profitability. We have maintained growth which anybody can look at the last 20 quarters and we have maintained an EBIT margin which is much higher than any FMCG company.

Latha: Are you saying that we as investors should factor in a 20 percent topline growth and 20 percent margins?

A: We don’t give guidance. Anybody can look at the performance of the company for the last couple of years that will throw the trend. We never give any guidance either on topline or on margins.

Latha: Given the pressure you said the competition in the coffee space how much are you likely to spend on A&M, on marketing, on advertising and is that likely to whittle down margins at least for the next couple of quarters?

A: Tata Coffee, the core business, the commodity business doesn’t even have an advertising and promotion (A&P) apart from couple of fairs, etc.

Eight O' Clock Coffee has been spending substantially on the A&P. The brand has been completely revamped, packaging has been changed, changing the consumer targeting – there is a lot of what is going on over there.

However, Tata Coffee itself is a largely B2B business. We don’t have any advertising and promotion on this.

Latha: Eight O' Clock Coffee’s margins could be impacted you are saying?

A: Not to that extent. If you look at the total consolidated it is too huge for Eight O' Clock to make a business because Tata Coffee itself has become a very large company now.

Sonia: You just told us about how much pepper contributes to your bottomline. Can you give us some numbers, what is the exact percentage that the pepper business contributes and how much do you think you can grow it by?

A: Tata Coffee is a largest single producer of black pepper in India. We produce, we have got in extensively all our coffee extracts as well as tea extracts we produce. Pepper being an inter-crop, the actual cost attributed is very less, and the Indian production has come down from 65,000 tonne to 35,000 tonne. The prices which used to rule has virtually doubled in the last two to three years. So, there is a huge margin on that particular product.

The other one is that we have developed and end-to-end, we not only harvest the crop we have got an own processing centre in Kushalnagar where we can turn out global standards, meet the global requirements. So, that is a business which we have not talked about in the past but which is beginning to contribute substantially – not so much to topline but more to the bottomline.